1. Field of the Invention
The present invention relates generally to transaction systems and, in particular, to risk management, and fraud avoidance and minimization in transactions between a consumer or customer and a merchant or credit issuer.
2. Description of Related Art
In order to enable convenient purchases of goods and services by consumers, the financial service industry has developed many alternative payment methods, including checks, ATM or debit cards, credit cards or charge cards. Until the birth of virtual commerce, as discussed below, these payment options provided adequate convenience and transactional security to consumers and merchants in the marketplace. Transactional security is defined as the security offered by a payment method to the buyer and the seller in a purchase transaction so that the purchase event will not result in breach of personal information or financial loss from fraud perpetrated upon either party involved.
Virtual commerce and the growth of the Internet as a medium for commerce has put pressure on the payment options cited above on both the convenience and transactional security dimensions. Specifically, checks require physical presentment and clearing of the check prior to shipment of goods. Credit cards are more convenient for the consumer, but are subject to fraudulent use via theft of the account number, expiration date and address of the consumer. Debit cards lack a credit facility and often require a separate personal identification number (PIN) number to be used. The financial services industry is currently attempting to improve performance of existing products by introducing disposable account numbers and electronic checks. Today, all of the improvements offered have sought to improve transactional security at the expense of the convenience during the purchase process.
Each of the payment options in place today has significant shortcomings when applied to remote purchases. Remote purchases are defined as those purchases where the buyer and the seller (the merchant) are not physically proximate during the transaction. Specific examples of remote purchases are mail order, telephone order, Internet and wireless purchases.
Merchants have long battled the problem of fraudulent purchases. Each new payment option and every new sales channel (in-store, telephone, mail, and Internet) has, in turn, spawned innovation on the part of individuals willing to perpetrate fraud in order to obtain goods and services without paying for them. In recent years, the birth of the Internet commerce industry and the continued growth in mail order and telephone order commerce has pushed the credit card to the forefront of these battles. Merchants are forced to rely on credit cards because it is currently their only option in the remote purchase environment. Unfortunately, credit cards offer low transactional security to both merchants and consumers when used for remote purchases.
Low transactional security in remote purchases leads to significant costs for consumers and merchants. Consumer costs include the impairment of their credit record, the inconvenience of changing all of their credit card accounts and the financial costs of resolving the situation. Many consumers have reacted to this by avoiding remote purchasing, particularly on the Internet.
Merchant costs incurred to mitigate fraud losses include the cost of incremental labor, hardware and software to implement additional security checks in their sale/order entry software, higher transaction processing expense in the form of discount rates for credit cards and NSF fees for checks and higher fraud charge-offs for undetected fraudulent purchases.
Essentially these costs are forced onto the parties involved in the remote purchase transaction because other card-based options failed to incorporate adequate security in two ways:                1. The account number is used as a public credential along with expiration dates and very limited address information. A public credential is defined as a transaction-enabling form of identification that accesses financial balances or credit lines or credit in order to complete a purchase of goods or services. For example, in the credit card arena, account numbers are the primary enablers of access to purchase. The fact that the account number is the key to credit causes the user to focus on creating counterfeit numbers and stealing valid numbers via a variety of methods.        2. The current industry standard process for authorizing a purchase for a credit or charge card customer provides inadequate authentication to protect merchants and consumers from external cost to the remote purchase transaction. The process, instead, focuses only on whether the account in use is open and in good standing and whether there exists adequate credit available to fund the purchase. Fraud detection routines in use are typically statistically-based pattern recognition algorithms, but are not capable of authenticating a customer. In fact, the current standard authorization message formats do not support the transmission of vital authentication information from the merchant to the issuer of the credit or charge card. Some products do employ a very limited verification key built on portions of the customer's name and address, but the keys in use are not adequate to create a high level of transactional security.        
Individual consumers prefer to purchase from individual merchants. Some consumers find the available acceptable payment options a barrier to purchase, for example, Internet purchases where the barriers are possession of a credit card, willingness to disclose a credit card number, inconvenience of remembering 16 digit numbers, and so on.
The alternate methods in which this problem has been solved, and their drawbacks, are as follows. Credit cards, fiat currencies and novel payment mechanisms have been one such solution. In these cases, a third party defers consumer relationship costs among multiple merchants. In operation, the consumer provides to the merchant a key provided by the trusted third party (credit card issuer) which signifies or uniquely identifies the consumer/third-party relationship. The problem is that in all cases the consumer must have a previously established relationship with the third party (credit card issuer). Huge costs of customer acquisition limit the viability of business models. Another solution has been a merchant specific bill. However, the incremental costs of rendering, collecting and administrating their own bill has a dilutive effect on merchant profitability.
One particular type of fraud is referred to as “masking”. This type of fraudulent transaction is experienced by merchants, and unfortunately merchants are often left without any recourse. “Masking” occurs as follows (as illustrated in FIG. 1). A fraudster A engages in a transaction with a merchant B. This type of fraud is particularly prominent on the Internet, where anonymity is typically easy to maintain. In this particular fraudulent transaction, the fraudster A has acquired a person's private information, or even information that is easy to obtain, such as name, address, telephone number, e-mail address, etc. The fraudster A transmits data in the form of a transaction data set C to the merchant B. Based upon the provided information, the merchant B verifies or otherwise authenticates the fraudster A using data in the provided transaction data set C. Accordingly, the transaction is authorized by the merchant B.
Next, the fraudster A engages in a subsequent transaction using the victim's information. However, as seen in FIG. 1, one of the data fields may be slightly modified by the fraudster A. This modification is slight enough that the merchant B still authenticates and authorizes the transaction. The fraudster will continue this practice, again as shown in FIG. 1, slightly modifying yet another field in the transaction data set C just enough to receive authentication and approval, but not enough that the transaction is outright denied by the merchant B.
Once the victim realizes that these fraudulent transactions have occurred, in most instances, all of the transactions will be charged back to the merchant B. In the prior art, the merchant B may catch one, some or none of these fraudulent and masked transactions. Typically, the merchant B and/or the bank or credit issuer, is not equipped to spot this type of fraud.